How the Depression Made Keynesians of Capitalists: Echoes
Re-elected with 61 percent of the vote in 1936, President Franklin D. Roosevelt told his supporters, "Now I'm going back to do what they call balance the budget." True to his word, he cut spending and promptly sent the nation into a recession -- a sharper decline than in 1929.
The orthodox wisdom in Washington in 1937 remained cutting spending, reducing taxes and balancing the budget to restore business confidence. Punitive taxes on investments and capital gains and "unreasonable restrictions" on finance had put businessmen into "a state of stagnation if not panic," critics of the New Deal argued. Uncertainty was the main reason the economy was in a slump, declared the U.S. Chamber of Commerce. The conservative "Brass Hats" of the National Association of Manufacturers told Roosevelt to end social-welfare policies and get tough with labor if he wanted to reduce unemployment. Chase National Bank President Winthrop Aldrich said it was time to "dismantle the anti-business elements of the New Deal."
Many in the Roosevelt administration also believed business confidence was key. Treasury Secretary Henry Morgenthau Jr., a close friend of the president, promoted the "Treasury view" that government spending merely crowded out private investment. The only way out of the Great Depression, Morgenthau said, "was through restoring business confidence." The liberal Securities and Exchange Commission Chairman William O. Douglas believed that corporate executives were "marking time" and going on vacation rather than investing their firms' cash. Roosevelt himself never completely shook off his view that balanced budgets were a good thing. He had chastised Herbert Hoover for big deficits in the 1932 campaign and cut the wages of federal workers by 15 percent when he took office. His behavior in 1936 was completely in character.
But Roosevelt and his New Dealers would eventually give up conventional thinking on government spending. Business confidence gave way to demand management as the policy of the Democratic Party. That story is well-known. More surprising is that liberal politicians and economists were supported by a range of business leaders. Within five years of the 1937 recession, part of the business community had formed a "growth coalition" centered on the proposition that only government spending could end the Depression -- and thus save capitalism.
One of the more unexpected business voices for growth and spending was a Republican Mormon banker named Marriner Eccles. From a wealthy Utah family, Eccles had taken charge of his father's construction business and diversified into finance and other areas. His company survived the Depression, but he learned that austerity and savings were self-defeating. "In seeking individual salvation," he wrote, "we are contributing to collective ruin." The grim ironies of Depression economics had led him "face to face with the proposition that the only way we could get out of the depression was through government action."
Appointed chairman of the Federal Reserve by Roosevelt, Eccles was unable to get his fellow Fed governors to embrace a more liberal monetary policy. But he was an early supporter of Keynesian fiscal stimulus.
Gradually other business leaders came to conclusions similar to Eccles. Charles E. Wilson, president of General Electric, called for spending to restore full employment. Progressive manufacturer Henry Dennison dismissed businesspeople who clung to laissez-faire ideology as the "lazy fairies."
Dennison joined forces with Paul Hoffman of Studebaker, advertising executive William Benton, and top managers from Eastman Kodak, General Foods, Sears and General Motors in the Committee for Economic Development in 1942. Fearful that the economy would slip back into a depression once World War II ended, they advocated an activist state that spent money to promote consumption and high employment. Their position was hardly radical, and they aimed their appeal at "all who are interested in keeping the system of private enterprise and larger personal freedom." But they understood that capitalism could survive only if there was a way to "counter the tendencies toward boom and depression." Capitalism required growth, by whatever means necessary.
The growth logic took time to penetrate the rest of the business community. Even after the great spending surge of World War II wiped out unemployment, the National Association of Manufacturers and the Chamber of Commerce continued to argue that government deficits were "job destroying." This "strange thinking," Hoffman told the NAM, would "fasten upon us an economy of scarcity."
But soon even the Chamber of Commerce took the plunge and joined the growth coalition. Under the dynamic leadership of Eric Johnston, it supported the Full Employment Act of 1946, a Keynesian, albeit conservative, embrace of government spending to reduce the boom-and-bust cycle that Hoffman feared. Johnston, a wounded veteran of World War I, had built up the largest appliance distributorship in the Northwest, starting out as a door-to-door vacuum-cleaner salesman. This Main Street entrepreneur understood that capitalism couldn't survive on a starvation diet. "We can't afford to go into another tailspin," he told the Chamber's staff. "Another depression would mean the loss of our system."
Growth now took precedence over the conventional thinking on balanced budgets and the ideology of market self-regulation. After World War II, the U.S. embraced a Keynesian anti-depression economics that united business, government and labor. That coalition would endure for the next 40 years of prosperity.
(Kenneth Lipartito is a professor of history at Florida International University. His co-written history of corporate social responsibility will be published in 2012. The opinions expressed are his own.)
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